DIY Investor Magazine
/
2015 Issue
38
The tax year is almost at an end. It is the time for
the DIY investor to ensure portfolios are as efficient
as possible by making best use of the available
allowances.
For most investors the big two of these are the
Individual Savings Account (ISA) and their pension.
The two make for a classic combination that ensures
your money works even harder. But don’t forget the
annual capital gains tax allowance because if used
each year, over the longer term it can add thousands of
pounds to the value of assets.
ISAS AND PENSIONS
For most investors, the ISA is a staple component of
their portfolio. For the current tax year, investors can
subscribe up to £15,000 in (the new NISA) stocks and
shares and cash ISAs. For DIY investors, shares, funds
and bonds are likely to dominate ISAs and it is possible
to manage the assets, buying and selling as the holder
chooses. While funds need to be subscribed before
the tax year end to use this year’s allowance, there is
no compulsion to invest straight away if it is judged
that market conditions are not yet right. Within the wrap
profits can be taken tax free and there is no further
liability on dividends and distributions.
The other big product in most investors’ long term
planning will be a pension. Again the wrap is tax
efficient with no further liability on profits and income
but the pension also offers tax relief on subscriptions.
And investors can subscribe up to 100% of earnings
to a maximum of £40,000 this year. For DIY investors
seeking maximum control, Self Invested Personal
Pensions (SIPPs) are perhaps the most attractive way
of saving for retirement.
MAKE YOUR PORTFOLIO
TAX EFFICIENT
They put the ‘Member’ in the driving seat, making
investment decisions of what to buy and sell, within the
universe of permitted assets, and as importantly, when.
CGT ALLOWANCE
One often overlooked allowance is the annual Capital
Gains Tax allowance. The Revenue allows us to make
profits each year of up to £11,000 free of tax. Over the
years this can really add up but if it’s not used, that
allowance will be lost. Portfolios can be made more tax
efficient by taking advantage of this allowance. Taking
profits each year can ensure that when you want to sell
in the future, you haven’t built up unnecessarily large -
taxable - profits.
Many investors take profits up to the annual allowance
each year; often offsetting profits against losses. But
you don’t need to lose investments that you still favour.
Matching rules mean that you can’t buy back the
stock within 30 days and register a profit or loss for tax
purposes. However, a ‘Bed and ISA’ transaction means
you sell an asset to take the profit but by repurchasing
within the tax wrap of an ISA, you maintain exposure.
Ask your broker about the process.
ISA OR SIPP?
The perennial debate about whether to choose an ISA
or a SIPP is all around us again. There are of course
differences: both offer tax efficient environments for
profits and income. The pension attracts tax relief
and contributions can be back dated, but cannot be
accessed until retirement. The ISA is more flexible and
while there is no relief on subscriptions, an income
can be drawn with no additional liabilities. Both can
be employed for children and can form the basis of
investing for their future.
The truth is that these are relief offered by the
government and the combination of ISAs, pensions and
the annual CGT allowance can be used to make your
assets as efficient as possible. Over the longer term
the potential savings in tax liability on profits, income
and relief on subscriptions can be truly profound. Tax
erodes the value of investments. Make as full use of
these allowances to protect your wealth.
THE TRUTH IS THAT THESE ARE RELIEFS OFFERED BY
THE GOVERNMENT AND THE COMBINATION OF ISAS,
PENSIONS AND THE ANNUAL CGT ALLOWANCE CAN
BE USED TO MAKE YOUR ASSETS AS EFFICIENT AS
POSSIBLE
